New Mortgage Rules Effective October 17

Thursday Oct 20th, 2016


In this post I will explain how the new rules layed out by the finance minister will affect you.

1. The "Stress Test"

This rule will only affect you if you are putting less than a 20% down payment on your purchase. This type of loan is known as a high-ratio mortgage. Previously this rule was already applied on variable rate high-ratio mortgages, but will now affect all high-ratio mortgages, both fixed term and variable.

The term "stress test" means that the bank will be more strictly analyzing how much financial "stress" you can handle as a borrower. They will do this by using the Bank of Canada's posted interest rate (currently 4.64%) to qualify you for your mortgage, as opposed to the rate offered by the banks (say 2.59%). You will still receive the bank rate for your actual mortgage (2.59%), but because you must qualify at a higher rate (4.64%), it means that you will be able to borrow less money because the principal amount of money you actually receive will be less, given the higher interest rate at which you are qualifying. 

2. Foreign Seller Tax Loophole Closed

This rule will now require you to report the sale of your home on your tax return. The reason for this is for the Canada Revenue Agency to gather more information as to who is truly a primary resident in Canada. Reporting the sale of your home on your taxes will show that it is your primary residence and exempt you from paying any capital gains on the sale of your property. The idea behind this is that it will expose foreign sellers who are claiming their properties as principal residences in order avoid paying capital gains taxes.

3. Restrictions on Insurance For Low-Ratio (Conventional) Mortgages

Low-ratio mortgages are your standard mortgages where 20% or more of the purchase price has been put as a down payment. The big banks in the past could optionally insure low ratio mortgages, at more lenient guidelines than the ones now taking effect. The new guidelines that the big banks will be following when they choose to insure low-ratio mortgages are:

- You must now have a Gross Debt Service Ratio (GDS), [which is the percentage of your income required to pay for housing], at a maximum of 39%, and a Total Debt Service Ratio (TDS), [which is the percentage of your income required to pay all debts], at a maximum of 44%.

- Your maximum purchase price must be under $1 Million and the mortgage can only be amortized [the length of time to pay off the mortgage] over 25 years.

- Your mortgage must also be for your primary residence, and you must have a credit score of at least 600.

If these conventional mortgages insured by the big banks were to default, the cost would be on the taxpayer, since the federal government currently assumes the full cost of insured mortgages in the event of defaults. These new rules make it more difficult for the banks to insure low-ratio mortgages.

These new rules therefore protect the taxpayer from being on the hook for insured mortgages on homes that default. This is impactful especially in Vancouver and Toronto where prices are more often than not over $1 million, with large mortgages. 

These rules also make it harder for people who want to get into the investment market, since banks who insured investor mortgages now have more restrictions. So if you are a potential investor looking for a rental property and are taking out a mortgage on that property, you would have to find a lender who does not need to insure mortgages.

Mortgage Brokers are already working to find solutions to the new issues that are arising out of these new rules.

These rules do not affect existing mortgages. 


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